Gold on correction path as support factors weaken

What propelled gold to reach a staggering price level of $1,580 a troy ounce recently is now set to negatively hit the precious metal and drag it down as dramatically as it rose. We are referring to the ongoing epidemic of novel coronavirus (nCoV) emanating from Wuhan in China.

Without doubt, the outbreak and its rapid spread resulted in gold profiting from risk aversion among market participants. Huge uncertainty among investors meant gold’s safe haven demand received a big boost. There are also additional factors, including central bank purchases, ETF inflows and large flow of speculative capital that helped gold rally.

Correction time

It is now clear, the rally is overdone. While how long the epidemic will last and how soon it will be contained is still a matter of conjecture, it is clear that nCoV is seen destroying the already fragile physical demand. Many parts of China are facing travel restrictions and public life stands halted. There is consensus that the Asian major’s economic growth is at risk.

Looking ahead, H1 2020 is going to be hugely challenging for China. Gold import volumes are certain to shrink and physical demand will remain enervated, compounded by weak currency and high local prices. Already, Chinese consumers are seen going for lightweight jewellery.

No wonder, World Gold Council (WGC) in its report estimated a 15 percent decline to about 900 tonnes in the Asian major’s import last year. If anything, it can get worse this year.

India scene

India is no different. Despite hectic lobbying by interest groups, the recent Union Budget left import duty on gold unchanged; and rightly so. At well over ₹40,000 per 10 grams, gold rates in the country have reached all-time high, making the precious metal unaffordable for many. A weak rupee makes matters worse.

As price elasticity of demand kicks in, import volumes will shrink as evidenced by a fall in physical import last year. 2020 will continue to be challenging for the country as the economy has not got the much-needed booster dose. Also, there is nothing to suggest rural incomes are going to rise markedly.

WGC sees a decline in India’s gold demand in 2019 and estimates it at about 690 tonnes, a fall of 9 per cent. If prices continue to stay at the current elevated levels, demand destruction will continue. Only a significant price correction in the domestic market can stem the demand rot in India.

Taking all these into account, the gold market has already started to tread on the path of correction. On Thursday, it was trading at $1,555/oz, having lost another support factor in the form of the US President acquittal by the Senate.

Price fall begins

So, from its lofty levels, it has already shed $25/oz. It is expected to first breach $1,540/oz and then fall to $1,500/oz levels in the course of the coming weeks. The price fall, as always, will be exaggerated as speculative longs liquidate their position rapidly.

But weak demand is not the only reason for the anticipated price correction. There are other contributory factors. Gold’s usual friends are geopolitical tensions, weak dollar and falling stock market. None of these support gold now. Geopolitical tensions are surely easing. While, the dollar continues to remain resilient, the stock market continues to perform well. So, less committed gold bulls will exit their position to move the money to equities.

Courtesy: HINDUBUSINESSLINE